Bowlero: Time to Strike
This will be a bit shorter and simpler than most writeups I do due to a possible time factor, but I believe Bowlero to be a really attractive short at the moment. While it has looked egregiously overvalued since de-spacing at the end of 2022 it has held up resiliently as other expensive growth spacs have crumbled around it. With significant insider sales over the past month I believe the current setup to offer a very attractive risk reward with a huge haircut incoming if they underperform and limited upside due to an already outrageous valuation. Finally, shoutout to @qorka on twitter who has been short this for a while and first brought this to my attention.
The Business
Bowlero Corp runs a chain of bowling alleys across North America under the AMF, Bowlmor and Bowlero brands. While the company’s origins date back almost to WW2, Bowlero in it’s current state was formed at the bankruptcy of AMF Bowling Worldwide as they merged with Strike Holdings LLC in 2012. Current CEO Thomas Shannon was the founder of Bowlmor in 1997 and has been CEO since the merger, with CFO Brett Parker being by his side since 2001. The company came public in late 2021 through a spac transaction and have been one of the few spac’s that has managed to hold up in value throughout 2022, being up 34% at the time of recording. Their strategy has been continuing to acquire local bowling centres, and have managed to grow revenue by around 65% in the past 5 years following this strategy.
The Financials
Put simply, Bowlero trades at a ridiculous valuation. By my calculations they trade at around a 50 price to normalised net income multiple, which is absurd for a capital intensive bowling company with mediocre growth. Bulls would point to a 120% increase in revenue and inflecting operating margins however that’s coming off a significantly depressed 2020 and 2021. I think it’s fair to believe that Bowlero has benefited greatly from the reopening of the economy. Even if revenue doesn’t decline in the near future, the likelihood of sustaining that sort of growth is incredibly low. Furthermore, Bowlero doesn’t have a huge amount of room to manoeuvre with regards to their balance sheet. Bowlero has $800m of floating rate debt due 2024 compared to $110m of cash and equivalents. While they should be able to refinance, they’re certainly not in a comfortable position and continued rate hikes would hit their profitability considerably.
The Thesis
There are 3 very simple factors that make this a good short idea. The first is obviously valuation. Even in the bull case Bowlero looks expensive, and would probably still look expensive at half the valuation it currently sits at. However, a short just based on valuation alone is never a good short. The second factor that makes it a good short is simply mean reversion. Bowlero have likely been overearning due to the covid reopening with significantly higher gross and operating margins than historically and a significant increase in per store revenue compared to pre-pandemic. While there’s always a chance they are able to maintain this, I believe it’s more likely that demand eases and margins revert at least a bit.
Finally, this thesis has been the case for over a year now, yet the final factor is what makes me believe now is the time to act upon it at near all time highs. What gives me confidence in this short is a huge selldown in January from Bowlero’s two key managers: CEO and Chairman Thomas Shannon and CFO and Vice-Chairman Brett Parker. While Parker has sold a small amount of his total shares, Shannon has sold a whopping 55% of his ownership stake. Meanwhile, stock based compensation has reduced significantly (which would be a good thing usually, but within this context probably suggests a lack of faith in the stock price). You don’t sell 50% of your holdings in a company you founded without a real lack of faith in the valuation. This could just be fears around general overvaluation, or more likely observing a weakness in the underlying business. Either way, there is likely significant downside in the stock price from here. With such price strength I’ve been hesitant to short the stock however I believe that the founder and CEO selling down over half of his shares is as good a signal as any. With low short interest and cheap borrow I believe Bowlero to be a very asymmetric short opportunity.